05/25/2010 05:12 am ET Updated May 25, 2011

Chicago Public Schools Dodges A Budget Bullet -- For Now

The Illinois General Assembly, acting with a speed and purpose unseen since it defenestrated Rod Blagojevich, approved reforms to the state's pension system yesterday that are projected to save the state $100 billion in the coming decades.

But the most consequential portion of the bill in the near term is a provision that would allow Chicago Public Schools to reduce its pension contribution by $400 million per year for the next three years. That's good news for a district facing an immediate deficit of $975 million.

As a result of the pension holiday, most of the doomsday steps outlined by CPS -- 37-student classes, laying off 3,000 teachers, and slashing allocations to charter schools by 17 percent -- are likely off the table. CPS now faces a deficit in the neighborhood of $600 million, a number that would shrink to $300 million if the state increases its income tax by one percentage point and thereby maintains its current level of education funding.

Still, the decision to reduce the deficit through a pension holiday raises at least two questions. First, how should CPS deal with the remaining $300 million deficit that would remain even after a tax hike? And second, is deferring $1.2 billion in pension payments over the next three years a sound fiscal practice?

To clean up the rest of its 2010 problems, CPS could reduce expenditures in a number of areas.

For starters, canceling a scheduled 4 percent pay raise for teachers would save $170 million. This step would be particularly reasonable given that, as private-sector workers throughout the region see their wages stagnate, teachers will still receive their contractually-obligated step increases next year. Deferring the 4 percent pay hike would also prevent younger teachers from being laid off, which would in turn prevent class sizes from increasing.

The remaining $130 million can be dealt with through the a series of modest reforms. Canceling Kaplan's Instructional Delivery Systems would save $30 million. A moderate reduction in aid to charter schools -- so that they share the sacrifice with their traditional counterparts -- would save tens of millions more. And reductions in administrative staffing and a modest property tax hike can cover whatever is left.

But that still leaves the second, more troubling question: by shortchanging its pensions, is CPS simply creating a bigger mess down the road?

The General Assembly has demonstrated good judgment in creating a two-tiered pension system for public employees, including teachers, covered by state pension plans. Under the new legislation, these employees would have to work until age 67 to receive their full pensions, a significant increase from the current system that allows employees to retire at age 55, and would have their pensions capped at a maximum of just over $100,000. This is a strong first step in preventing state and local governments from again piling up massive, unfunded liabilities.

Alongside efforts to reduce future liabilities, CPS needs to become much clearer about how it plans to pay for its existing ones. Currently, the assets in its pension fund only cover about 70 percent of liabilities -- a number that's not bad by Chicago standards (the Police and Fire department funds stand at 47 and 40 percent, respectively), but still well below the 90 percent ratio recommended by fiscal experts. And with $1.2 billion in skipped payments over the next three years, that 70 percent ratio is about to deteriorate markedly.

While some money might become available to pay down pension debt if the city privatizes Midway Airport, CPS still needs to build space into its budget to make regular, sizable payments to its pension fund. This will mean finding new revenue, cutting expenses, or a combination of the two; the situation would also be helped if the state ended the system under which Chicago taxpayers contribute to both the state and city teacher pension funds even though Chicago teachers receive no benefits from the state fund.

The General Assembly's decision to allow a pension holiday appears to have allowed CPS to avert fiscal catastrophe. But even as the district moves past its 2010 crisis, residents ought not think that it has solved its pension-driven financial woes: without a serious plan to nurse its fund back to health, CPS is likely to find itself in precisely this situation a few years from now. And if that happens, the General Assembly might not be willing to let CPS yet again defer its day of reckoning.